2019 FCSC Q1 Shareholder Report

FARM CREDIT OF SOUTHERN COLORADO

2019

1st Quarter Report to Shareholders

Our mission is to be a growing and successful cooperative that empowers employees to be a financial partner to our members, while promoting the success of agriculture and our communities.

PATRONAGE

For over 100 years, Farm Credit has been passionately serving Rural America and Agriculture. We are proud to partner with the hard-working people who dedicate themselves to bettering America.

In the last 10 years, our cooperative has returned over $33,450,000 of profits to our eligible member-owners in patronage.

Our mission is to be a growing and successful cooperative that empowers employees to be a financial partner to our members while promoting the success of agriculture and our communities.

PORTFOLIO BREAKDOWN Our association loan summary as of March 31, 2019.

KEY NUMBERS $1,081,976

$3,961

At 3/31/19 IN THOUSANDS

NET INCOME At 3/31/19 IN THOUSANDS

$258,135

$4,500

TOTAL ASSETS

TOTAL SHAREHOLDER’S EQUITY

At 3/31/19 IN THOUSANDS

1

PATRONAGE DISTRIBUTED IN 2019 IN THOUSANDS

NOTICE TO STOCKHOLDERS The shareholders’ investment in Farm Credit of Southern Colorado, ACA is materially affected by the financial condition and results of operations of CoBank, ACB (CoBank).

The 2018 CoBank Annual Report to Shareholders, and the CoBank quarterly shareholders’ reports are available free of charge by accessing CoBank’s website, www.cobank.com, or may be obtained at no charge by contacting us at:

Farm Credit of Southern Colorado, ACA 5110 Edison Avenue, PO Box 75640 Colorado Springs, Colorado 80970-5640 Phone Number: 800-815-8559

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) The following discussion summarizes the financial position and results of operations of Farm Credit of Southern Colorado, ACA for the three months ended March 31, 2019, with comparisons to prior periods. You should read these comments along with the accompanying financial statements and footnotes and the 2018 Annual Report to Shareholders. The accompanying financial statements were prepared under the oversight of our Audit Committee.

In rural America, conditions continue to be challenging. Farmers continue to see low commodity prices due to large surpluses around the world and trade tariffs imposed on U.S. exports. Wheat continues to face hefty competition from export markets, which continues to put downward pressure on prices. U.S. corn plantings are still projected to raise more than 2 million acres this year; and there continues to be question as to whether China will buy U.S. corn and soybeans. The Brazilian corn crop is estimated to be 92 million tons. These planting forecasts will add pressure on corn prices as well.

While current financial conditions appear stable, farm income is low following sharp declines for several years. The prices of major agricultural commodities also remain low during the first quarter 2019. Note today, the price of corn is about 40% less than it was from 2010 to 2013. The silver lining in our territory is land values continue to remain stable.

Additionally, our producers’ economic conditions have been greatly impacted by the Midwest weather. The Midwest flooding in March, while devastating to those producers, will have a positive impact to our lending territory. Grain production lost in the Midwest will be relied upon from our region to fill in those supply gaps and thus hopefully provide improvement in price. From the feedback from our branch staff, planting of corn is on track and winter wheat is in excellent condition.

San Luis Valley, nestled in the mountain regions, is the lending territory for our potato producers. The snow is above normal and will provide sufficient irrigation water for the 2019 potato crop. The San Luis Valley producers are the 2nd to 3rd largest suppliers of fresh potatoes in the U.S. market. Prices have held to above breakeven in 2018 and is expected to occur again in 2019. Also, barley is another crop grown for the local brewing industry with Coors as the largest contractor. Prices continue to remain stable or improving.

Our cow/calf producers will benefit greatly with all the moisture in the first quarter of 2019. Pastures are beginning to green up. This will provide an adequate feed source in rotating cattle during the summer months. Calf prices are seeing improvement for the fall run supply being impacted from the Midwest flooding.

In summary, heavy rain and snow storms during late fall and early winter have eased drought conditions and improved moisture conditions considerably in our lending territory. The mountains and eastern plains have received above normal snow and moisture which has resulted in excellent subsoil conditions for spring planting and excellent moisture to bring up the winter wheat. There is much optimism for the 2019 crop year with our producers heading into second quarter planting season.

LOAN PORTFOLIO Loans outstanding at March 31, 2019, totaled $1.02 billion, a decrease of $9.2 million, or 0.90%, from loans of $1.03 billion at December 31, 2018. The decrease was primarily due to annual pay downs and payoffs outpacing new core loan activity partially offset by an increase in our capital markets portfolio.

RESULTS OF OPERATIONS Net income, excluding comprehensive income, for the three months ended March 31, 2019, was $4.0 million, a decrease of $416 thousand, or 9.50%, from the same period ended one year ago. The decrease is primarily the result of a higher provision for credit losses, and a lower Farm Credit Insurance Fund distribution in 2019 as compared to the first three months of 2018, partially offset by higher net interest income.

Net interest income for the three months ended March 31, 2019, was $7.3 million, an increase of $564 thousand, or 8.35%, compared with the three months ended March 31, 2018. Net interest income increased due to an increase in our average accrual loan volume coupled with an increase in return on our loanable funds, partially offset by a decrease in the spread between our average borrower rate and our average cost of funds.

3

The provision for credit losses for the three months ended March 31, 2019, was $422 thousand, compared with the provision for credit loss reversal of $183 thousand for the same period ended one year ago. The provision for credit losses increased as a result of loan downgrades during the first quarter of 2019. In the first quarter of 2018, there was a credit loss reversal as a result of a lower average loss given default profile of the Association.

Noninterest income decreased $360 thousand during the first three months of 2019 compared with the first three months in 2018 primarily due to a decrease of $431 thousand in the refund from Farm Credit System Insurance Corporation (FCSIC). The refunds are our portion of excess funds above the secure base amount in the FCSIC Allocated Insurance Reserve Accounts. Refer to the 2018 Annual Report to Shareholders for additional information.

There was also a $60 thousand decrease in patronage from CoBank during the first quarter 2019 as compared to the same period in 2018. These decreases were partially offset by an increase in mineral income. We received mineral income of $268 thousand during the first three months of 2019, which is distributed to us quarterly by CoBank.

During the first three months of 2019, noninterest expense increased $15 thousand to $4.5 million primarily due to increased purchased services costs from AgVantis, along with increased salaries and employee benefit costs, partially offset by a decrease in our occupancy and equipment costs.

CAPITAL RESOURCES Our shareholders’ equity at March 31, 2019, was $258.1 million, an increase from $253.3 million at December 31, 2018. This increase is due to net income, net stock issuances and amortization of pension costs included in the net periodic benefit cost.

The undersigned certify they have reviewed this report, this report has been prepared in accordance with all applicable statutory or regulatory requirements and the information contained herein is true, accurate, and complete to the best of his or her knowledge and belief.

___//signed//_______________________ Mark Peterson Chairman of the Board May 6, 2019

___//signed//_______________________ Jeremy M Anderson CEO May 6, 2019

___//signed//_______________________ Shawna R Neppl CFO May 6, 2019

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Farm Credit Southern Colorado, ACA

Consolidated Statement of Condition (Dollars in Thousands)

ASSETS Loans Less allowance for loan losses Net loans Cash Accrued interest receivable Investment in CoBank, ACB Investment in AgDirect Premises and equipment, net Prepaid benefit expense Other assets Total assets LIABILITIES Note payable to CoBank, ACB Advance conditional payments Accrued interest payable Patronage distributions payable Accrued benefits liability Reserve for unfunded commitments Other liabilities

March 31 2019

December 31 2018

UNAUDITED

AUDITED

$

1,018,940 3,303 1,015,637 2,436 14,590 32,435 137 12,282 2,255 2,204

$

1,028,163 2,863 1,025,300 9,015 16,531 32,435 137 11,939 2,409 5,031

$

1,081,976

$

1,102,797

$

807,094 12,105 1,961 448 398 1,835

$

828,090 10,647 1,884 4,500 735 411 3,193

Total liabilities

823,841

849,460

3,621 1,447 253,567 (500)

2,826 1,454 249,624 (567)

Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred stock Capital stock Unallocated retained earnings Accumulated other comprehensive (loss)/income Total shareholders' equity

258,135

Total liabilities and shareholders' equity

$

1,081,976

253,337 $

1,102,797

The accompanying notes are an integral part of these consolidated financial statements.

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Farm Credit Southern Colorado, ACA

Consolidated Statement of Comprehensive Income (Dollars in Thousands)

For the three months ended March 31 2019 2018

UNAUDITED INTEREST INCOME Loans

$

Total interest income

13,475

$

11,550

13,475

11,550

6,112 46

4,786 11

Total interest expense Net interest income Provision for credit losses/(Credit loss reversal)

6,158 7,317 422

4,797 6,753 (183)

Net interest income after provision for credit losses/credit loss reversal

6,895

6,936

24 91 822 247 268 88

38 101 882 678 141 60

1,540

1,900

2,535 362 536 175 113 750

2,483 443 471 (3) 167 95 800

4,471 3,964 3

4,456 4,380 3

3,961

4,377

67

66

INTEREST EXPENSE Note payable to CoBank, ACB Other

NONINTEREST INCOME Financially related services income Loan fees Patronage distribution from Farm Credit institutions Farm Credit Insurance Fund distribution Mineral income Other noninterest income Total noninterest income NONINTEREST EXPENSE Salaries and employee benefits Occupancy and equipment Purchased services from AgVantis, Inc. Gains on other property owned, net Farm Credit Insurance Fund premium Supervisory and examination costs Other noninterest expense Total noninterest expense Income before income taxes Provision for income taxes Net income COMPREHENSIVE INCOME Amortization of retirement costs Total comprehensive income

$

4,028

$

The accompanying notes are an integral part of these consolidated financial statements.

6

4,443

Farm Credit Southern Colorado, ACA

Consolidated Statement of Changes in Shareholders' Equity (Dollars in Thousands)

Preferred Stock

Capital Stock

Balance at December 31, 2017 Comprehensive income Stock issued Stock retired Preferred stock dividends Balance at March 31, 2018

$ 2,619

$ 1,410

100 (78) 4 $ 2,645

$ 1,419

Balance at December 31, 2018 Comprehensive income Stock issued Stock retired Preferred stock dividends Balance at March 31, 2019

$ 2,826

$ 1,454

UNAUDITED

1,170 (386) 11 $ 3,621

Unallocated Retained Earnings $ 238,141 4,377

Accumulated Other Total Comprehensive Shareholders' Income/(Loss) Equity $

(841) 66

$

(775)

$

(567) 67

$

(500)

37 (28) (7) $ 242,511

$ 249,624 3,961

32 (39) $ 1,447

(18) $ 253,567

$ 241,329 4,443 137 (106) (3) $ 245,800

$ 253,337 4,028 1,202 (425) (7) $ 258,135

The accompanying notes are an integral part of these consolidated financial statements.

7

NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands, Except as Noted) (Unaudited)

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES A description of the organization and operations of Farm Credit of Southern Colorado, ACA (the Association), the significant accounting policies followed, and the financial condition and results of operations as of and for the year ended December 31, 2018, are contained in the 2018 Annual Report to Shareholders. These unaudited first quarter 2019 financial statements should be read in conjunction with the 2018 Annual Report to Shareholders.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial information. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements and should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2018, as contained in the 2018 Annual Report to Shareholders.

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results for the interim periods. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. Descriptions of the significant accounting policies are included in the 2018 Annual Report to Shareholders. In the opinion of management, these policies and the presentation of the interim financial condition and results of operations conform with GAAP and prevailing practices within the banking industry.

In August 2018, the Financial Accounting Standards Board (FASB) issued guidance entitled “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Cost.” The guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance. This guidance becomes effective for interim and annual periods beginning after December 15, 2019. The guidance also requires an entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. It further specifies where to present expense and payments in the financial statements. Early adoption is permitted. The guidance is to be applied on a retrospective or prospective basis to all implementation costs incurred after the date of adoption. The Association is evaluating the impact of adoption on the Association’s financial condition and its results of operations.

In August 2018, the FASB issued guidance entitled “Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans.” The guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance becomes effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The guidance is to be applied on a retrospective basis for all periods. The adoption of this guidance will not impact the Association’s financial condition or its results of operations, but will impact the employee benefit plan disclosures.

In August 2018, the FASB issued guidance entitled “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” The guidance modifies the requirements on fair value measurements by removing, modifying or adding to the disclosures. This guidance becomes effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted and an entity is permitted to early adopt any removal or modified disclosures and delay adoption of the additional disclosures until their effective date. The adoption of this guidance will not impact the Association’s financial condition or its results of operations, but will impact the fair value measurements disclosures. The Association early adopted the removal and modified disclosures during the fourth quarter of 2018.

In June 2016, the FASB issued guidance entitled “Measurement of Credit Losses on Financial Instruments.” The guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Credit losses relating to available-for-sale securities would also be recorded through an allowance for credit losses. For public business entities that are not U.S. Securities and Exchange Commission filers this guidance becomes effective for interim and annual periods beginning after December 15, 2020, with early application permitted. The Association is evaluating the impact of adoption on its financial condition and results of operations.

8

In February 2016, the FASB issued guidance entitled “Leases.” The guidance requires the recognition by lessees of lease assets and lease liabilities on the balance sheet for the rights and obligations created by those leases. Leases with lease terms of more than 12 months are impacted by this guidance. In July 2018, the FASB issued an update entitled “Leases – Targeted Improvements,” which provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. An entity that elects this additional transition method must provide the required disclosures of the now current standard for all prior periods presented. The guidance and related amendments in this update became effective for interim and annual periods beginning after December 15, 2018, with early application permitted. The adoption of this guidance resulted in an immaterial impact on the Association’s financial condition and results of operations.

NOTE 2 - LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of loans follows.

March 31, 2019 Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Rural residential real estate Mission-related Agricultural export finance Total loans

$

592,543 176,038 160,775 79,927 43 1,101 8,513

$

1,018,940

December 31, 2018 $

609,071 178,320 151,480 79,620 44 1,116 8,512

$ 1,028,163

The Association purchases and sells participation interests with other parties in order to diversify risk, manage loan volume and comply with Farm Credit Administration regulations. The following table presents information regarding the balances of participations purchased and sold at March 31, 2019:

Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Agricultural export finance Total

Other Farm Credit Institutions Purchased Sold $ 39,952 $ 41,358 22,279 ─ 152,349 ─ 79,927 ─ 8,513 ─ $ 303,020 $ 41,358

9

Non-Farm Credit Institutions Purchased Sold $ 1,903 $ ─ ─ ─ ─ ─ ─ ─ ─ ─ $ 1,903 $ ─

Total Purchased Sold $ 41,855 $ 41,358 22,279 ─ 152,349 ─ 79,927 ─ 8,513 ─ $ 304,923 $41,358

One credit quality indicator utilized by the Association is the Farm Credit Administration Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows:     

Acceptable – assets are expected to be fully collectible and represent the highest quality.

Other assets especially mentioned (OAEM) – assets are currently collectible but exhibit some potential weakness.

Substandard – assets exhibit some serious weakness in repayment capacity, equity and/or collateral pledged on the loan.

Doubtful – assets exhibit similar weaknesses to substandard assets; however, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable.

Loss – assets are considered uncollectible.

The following table shows loans and related accrued interest classified under the Farm Credit Administration Uniform Loan Classification System as a percentage of total loans and related accrued interest receivable by loan type as of: March 31, 2019 Real estate mortgage Acceptable OAEM Substandard Doubtful Total Production and intermediate-term Acceptable OAEM Substandard Doubtful Total Agribusiness Acceptable OAEM Substandard Total Rural infrastructure Acceptable OAEM Substandard Total Rural residential real estate Acceptable Total Mission-related Substandard Total Agricultural export finance Acceptable Total Total Loans Acceptable OAEM Substandard Doubtful Total

10

December 31, 2018

90.03% 4.17% 5.69% 0.11% 100.00%

90.50% 4.17% 5.33% ─ 100.00%

88.77% 4.76% 6.43% 0.04% 100.00%

87.83% 5.25% 6.88% 0.04% 100.00%

96.21% 2.29% 1.50% 100.00%

97.08% 1.54% 1.38% 100.00%

95.85% 0.70% 3.45% 100.00%

99.28% 0.72% ─ 100.00%

100.00% 100.00%

100.00% 100.00%

100.00% 100.00%

100.00% 100.00%

100.00% 100.00%

100.00% 100.00%

91.22% 3.67% 5.04% 0.07% 100.00%

91.64% 3.67% 4.68% 0.01% 100.00%

High risk assets consist of impaired loans and other property owned. These nonperforming assets (including related accrued interest) and related credit quality are as follows: March 31, 2019

(dollars in thousands) Nonaccrual loans Real estate mortgage Production and intermediate-term Agribusiness Mission-related Total nonaccrual loans Accruing restructured loans Real estate mortgage Production and intermediate-term Total accruing restructured loans Accruing loans 90 days past due Real estate mortgage Production and intermediate-term

December 31, 2018

$

10,848 127 420 1,101

$

10,049 129 337 ─

$

12,496

$

10,515

$

501 691

$

495 789

$

1,192

$

1,284

$

2,147 ─

$

─ 75

Total accruing loans 90 days past due

$

2,147

$

75

Total impaired loans and total high risk assets

$

15,835

$

11,874

The Association had no other property owned for the periods presented.

Additional impaired loan information is as follows: March 31, 2019 Unpaid Recorded Principal Related Investment Balance Allowance Impaired loans with a related allowance for credit losses: Real estate mortgage Production and intermediate-term Agribusiness Mission-related Total Impaired loans with no related allowance for credit losses: Real estate mortgage Production and intermediate-term Total Total impaired loans: Real estate mortgage Production and intermediate-term Agribusiness Mission-related Total

$

$

652 9 420 1,101 2,182

$

$

626 9 433 1,101 2,169

$ 12,844 809 $ 13,653

$ 14,586 1,324 $ 15,910

$ 13,496 818 420 1,101 $ 15,835

$ 15,212 1,333 433 1,101 $ 18,079

$

$

$

$

7 1 106 380 494

7 1 106 380 494

December 31, 2018 Unpaid Recorded Principal Related Investment Balance Allowance

$

$

651 80 337 ─ 1,068

$

$

626 92 343 ─ 1,061

$

9,893 913 $ 10,806

$ 11,200 1,387 $ 12,587

$ 10,544 993 337 ─ $ 11,874

$ 11,826 1,479 343 ─ $ 13,648

$

$

$

$

5 31 106 ─ 142

5 31 106 ─ 142

Note: The recorded investment in the loan receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the loan receivable.

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For the Three Months Ended March 31, 2019 Average Interest Income Impaired Loans Recognized Impaired loans with a related allowance for credit losses: Real estate mortgage Production and intermediate-term Agribusiness Mission-related Total Impaired loans with no related allowance for credit losses: Real estate mortgage Production and intermediate-term Total Total impaired loans: Real estate mortgage Production and intermediate-term Agribusiness Mission-related Total

For the Three Months Ended March 31, 2018 Average Interest Income Impaired Loans Recognized

$

658 8 368 49

$

─ ─ ─ ─

$

558 ─ ─ ─

$

─ ─ ─ ─

$

1,083

$

─

$

558

$

─

$

11,219 815

$

15 11

$

12,904 1,919

$

10 41

$

12,034

$

26

$

14,823

$

51

$

11,877 823 368 49

$

15 11 ─ ─

$

13,462 1,919 ─ ─

$

10 41 ─ ─

$

13,117

$

26

$

15,381

$

51

The following tables provide an age analysis of past due loans (including accrued interest).

March 31, 2019 Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Rural residential real estate Mission-related Agricultural export finance Total

December 31, 2018 Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Rural residential real estate Mission-related Agricultural export finance Total

30-89 Days Past Due $ 525 7,977 ─ ─ ─ ─ ─

90 Days or More Past Due $ 7,266 117 ─ ─ ─ ─ ─

Total Past Due $ 7,791 8,094 ─ ─ ─ ─ ─

Not Past Due or less than 30 Days Past Due $ 594,075 172,111 161,472 80,304 43 1,101 8,539

$ 8,502

$ 7,383

$ 15,885

$ 1,017,645

Total Past Due 260 2,633 ─ ─ ─ ─ ─

Not Past Due or less than 30 Days Past Due $ 620,316 179,802 152,073 79,908 45 1,118 8,539

Recorded Investment in Loans Outstanding $ 620,576 182,435 152,073 79,908 45 1,118 8,539

$ 2,893

$ 1,041,801

$ 1,044,694

30-89 Days Past Due $ ─ 2,520 ─ ─ ─ ─ ─ $ 2,520

90 Days or More Past Due $ 260 113 ─ ─ ─ ─ ─ $

373

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Recorded Investment in Loans Outstanding $ 601,866 180,205 161,472 80,304 43 1,101 8,539 $1,033,530

Recorded Investment Accruing Loans 90 Days or More Past Due $ 2,147 ─ ─ ─ ─ ─ ─ $

2,147

Recorded Investment Accruing Loans 90 Days or More Past Due $ ─ 75 ─ ─ ─ ─ ─ $

75

A summary of changes in the allowance for loan losses is as follows:

Balance at December 31, 2018 Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Mission-related Agricultural export finance Total

Total

Charge-offs Recoveries

Balance at March 31, 2019

710 668 932 330 216 7

$

─ ─ ─ ─ ─ ─

$

─ ─ 5 ─ ─ ─

$

32 50 55 134 164 ─

$

$ 2,863

$

─

$

5

$

435

$ 3,303

$

Balance at December 31, 2017 Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Mission-related Agricultural export finance

Provision for Loan Losses/ (Loan Loss Reversals)

Charge-offs

Recoveries

675 557 693 317 13 6

$

─ 20 ─ ─ ─ ─

$

$ 2,261

$

20

$

$

─ ─ ─ ─ ─ ─

Provision for Loan Losses/ (Loan Loss Reversals) $

(92) 12 (68) 7 ─ ─

$

(141)

742 718 992 464 380 7

Balance at March 31, 2018 $

583 549 625 324 13 6

$ 2,100

The Association maintains a separate reserve for unfunded commitments, which is included in Liabilities on the Association’s Consolidated Statement of Condition. The related provision for the reserve for unfunded commitments is included as part of the provision for credit losses on the Consolidated Statement of Comprehensive Income, along with the provision for loan losses. A summary of changes in the reserve for unfunded commitments follows: For the Three Months Ended March 31 2019 2018 $

Balance at beginning of period Reversal of reserves for unfunded commitments

411

$

382

$

340

(13) $

Total

398

(42)

Additional information on the allowance for credit losses follows:

Allowance for Credit Losses Ending Balance at March 31, 2019 Individually Collectively evaluated for evaluated for impairment impairment Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Rural residential real estate Mission-related Agricultural export finance Total

Recorded Investments in Loans Outstanding Ending Balance at March 31, 2019 Individually Collectively evaluated for evaluated for impairment impairment

$

7 1 106 ─ ─ 380 ─

$

735 717 886 464 ─ ─ 7

$ 13,495 818 421 ─ ─ 1,101 ─

$

$

494

$

2,809

$ 15,835

$ 1,017,695

13

588,371 179,387 161,051 80,304 43 ─ 8,539

Recorded Investments in Loans Outstanding Ending Balance at December 31, 2018 Individually Collectively evaluated for evaluated for impairment impairment

Allowance for Credit Losses Ending Balance at December 31, 2018 Individually Collectively evaluated for evaluated for impairment impairment Real estate mortgage Production and intermediate-term Agribusiness Rural infrastructure Rural residential real estate Mission-related Agricultural export finance Total

$

5 31 106 ─ ─ ─ ─

$

705 637 826 330 ─ 216 7

$ 10,544 993 337 ─ ─ ─ ─

$

610,032 181,442 151,736 79,908 45 1,118 8,539

$

142

$

2,721

$ 11,874

$ 1,032,820

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The Association recorded no new TDRs during the three months ended March 31, 2019 and March 31, 2018.

The Association had no TDRs within the previous 12 months and for which there were subsequent payment defaults during the first three months of 2019 and 2018. Additional commitments to lend to borrowers whose loans have been modified in troubled debt restructurings were $546 at March 31, 2019 and $545 at December 31, 2018.

The following table provides information on outstanding loans restructured in troubled debt restructurings at period end. These loans are included as impaired loans in the impaired loan table.

Loans modified as TDRs March 31, 2019 Real estate mortgage Production and intermediate-term Total

TDRs in Nonaccrual Status*

December 31, 2018

March 31, 2019

December 31, 2018

$

501 691

$

495 789

$

─ ─

$

─ ─

$

1,192

$

1,284

$

─

$

─

* Represents the portion of loans modified as TDRs (first column) that are in nonaccrual status.

NOTE 3 - CAPITAL A summary of select capital ratios based on a three-month average and minimums set by the Farm Credit Administration follows.

As of March 31, 2019 Risk Adjusted: Common equity tier 1 ratio Tier 1 capital ratio Total capital ratio Permanent capital ratio Non-risk-adjusted: Tier 1 leverage ratio Unallocated retained earnings and equivalents leverage ratio

As of December 31, 2018

Regulatory Minimums

Capital Conservation Buffer

Total

19.71% 19.71% 20.01% 20.09%

19.68% 19.68% 19.94% 19.98%

4.5% 6.0% 8.0% 7.0%

2.5%* 2.5%* 2.5%* –

7.0% 8.5% 10.5% 7.0%

20.77%

20.78%

4.0%

1.0%

5.0%

21.49%

21.41%

1.5%

–

1.5%

* The 2.5% capital conservation buffer over risk-adjusted ratio minimums will be phased in over three years under the FCA capital requirements.

If capital ratios fall below the regulatory minimum plus buffer amounts, capital distributions (equity redemptions, cash dividend payments, and cash patronage payments) and discretionary senior executive bonuses are restricted or

14

prohibited without prior FCA approval. The current regulations establish a three-year phase-in of the capital conservation buffer, which began on January 1, 2017. There will be no phase-in of the leverage buffer.

The following tables present the activity in the accumulated other comprehensive loss, net of tax by component: For the Three Months Ended March 31 2019 2018 Pension and other benefit plans: Beginning balance Amounts reclassified from accumulated other comprehensive loss Net current period other comprehensive income

$ (567)

$ (841)

67 67

66 66

$ (500)

Ending balance

$ (775)

The following table represents reclassifications out of accumulated other comprehensive income/(loss).

Amount Reclassified from Accumulated Other Comprehensive Income/(Loss) For the Three Months Ended March 31 2019 2018 Pension and other benefit plans: Net actuarial loss

$

67

$

66

Total reclassifications

$

67

$

66

Location of Gain/Loss Recognized in Statement of Income Salaries and employee benefits

NOTE 4 - FAIR VALUE MEASUREMENTS Accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability. See Note 2 to the 2018 Annual Report to Shareholders for a more complete description.

Assets measured at fair value on a recurring basis are summarized below: Fair Value Measurement Using Level 1 Level 2 Level 3 Assets held in nonqualified benefits trusts March 31, 2019 December 31, 2018

$ $

8 8

$ $

– –

$ $

– –

Total Fair Value $ $

8 8

During the first three months of 2019, the Association recorded no transfers in or out of Levels 2 or 3.

The Association had no liabilities measured at fair value on a recurring basis at March 31, 2019 or December 31, 2018.

Assets measured at fair value on a non-recurring basis for each of the fair value hierarchy values are summarized below: Fair Value Measurement Using Total Fair Level 1 Level 2 Level 3 Value March 31, 2019 Loans

$

─

$

─

$ 1,695

$

1,695

December 31, 2018 Loans

$

─

$

─

$

$

281

281

With regard to impaired loans and other property owned, it is not practicable to provide specific information on inputs as each collateral property is unique. System institutions utilize appraisals to value these loans and other property owned and takes into account unobservable inputs such as income and expense, comparable sales, replacement cost and comparability adjustments.

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The Association had no liabilities measured at fair value on a non-recurring basis at March 31, 2019 or December 31, 2018.

Valuation Techniques As more fully discussed in Note 2 to the 2018 Annual Report to Shareholders, accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following presents a brief summary of the valuation techniques used by the Association for assets and liabilities, subject to fair value measurement.

Assets Held in Non-Qualified Benefits Trusts Assets held in trust funds related to deferred compensation and supplemental retirement plans are classified within Level 1. The trust funds include investments that are actively traded and have quoted net asset values that are observable in the marketplace.

Loans Evaluated for Impairment For impaired loans measured on a non-recurring basis, the fair value is based upon the underlying collateral since the loans are collateral dependent loans for which real estate is the collateral. The fair value measurement process uses independent appraisals and other market-based information, but in many cases, it also requires significant input based on management’s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters. As a result, these fair value measurements fall within Level 3 of the hierarchy. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. The fair value of these loans would fall under Level 2 hierarchy if the process uses independent appraisals and other market-based information.

NOTE 5 - SUBSEQUENT EVENTS The Association has evaluated subsequent events through May 6, 2019, which is the date the financial statements were issued, and no material subsequent events were identified.

16